SMEs and Climate Compliance: The Time is Now

By Shane Hughes, Carbon Consulting Lead, Ramboll

It is clear now that the majority of big business has mobilised in response to the climate emergency. Steadily gaining ground since the Paris accord, and encouraged by the landmark of last year’s COP26, the media has announced a stream of big corporates joining the Science Based Targets initiative (SBTi), from Hyundai Mobis to Kraft Heinz, and investing in green technologies. But what next? What of the companies behind the headlines? Net-zero is not solely the concern of international businesses. We all have a part to play, small and medium-sized businesses included. Given that SMEs make up 90% of the UK’s business population, for example, the sector’s role in the race to net-zero is vital and must be overlooked no longer.

What’s the rush?

Regulation is only going one way; tightening business activity as the data set and society’s ability to make meaningful change grows. Why be reactive when there are options available to be proactive? Being proactive on this subject makes strong business sense.

Again taking the UK as an example, consider the UK Government’s recent Procurement Policy Notice (PPN) 06/21. This PPN requires companies bidding for more than £5 million of Government spending to have committed to achieving net-zero by 2050, with a published carbon reduction plan. Or consider Network Rail’s commitment that 75% of its suppliers (by emission) will have a Science Based Target (SBT) by 2025. It is not only government contracts, but a motion for change gaining ground across the economy: Canary Wharf Group have committed to 60% of its suppliers having an SBT by 2025, and Nando’s Chickenland Limited have committed to reduce value chain emissions by 42% per meal by 2030.

Contracts are fast becoming dependent on carbon compliance. Good sustainability practices are the new face of opportunity to edge out market competitors. Deloitte recently published a study into the relationship between consumer behaviours and sustainability which reveals that nearly a third of consumers no longer purchase certain brands or products because of either sustainability or ethical concerns. These consumer behaviours are already having an effect at every level, from the food packaging now declaring the item’s carbon footprint to the boom in ESG finance and investment.

Businesses must be sure to not overlook internal sentiment on the subject either. With science showing the unequivocable risks of climate catastrophe, staff too are becoming more vocal about their employer’s actions on climate response and voting with their feet. Climate and carbon accounting should therefore be high on a business’s agenda at such a turbulent time as this, when staff retention is presenting such an immediate challenge.

What’s the next move?

Given the high profile of the topic in the media agenda and the prevalence and volume of scientific data, it would be fair to assume most decision makers have already been won over by the argument for action. The pertinent question is, therefore, how. The fear of greenwashing, and the corresponding fiscal consequences, means uncertainty abounds, and the task may seem too daunting for a company to take on, particularly for SMEs who may lack the legal firepower.

However, SBTs, the main route big corporates have chosen to make credible developments in carbon compliance, are not just relevant for these big corporates, but smaller companies too. Lacking a dedicated sustainability department may have meant the admin of such a scheme felt disproportionate to its value to many businesses, but if SMEs take a five step, pragmatic approach, an approved SBT is achievable and they can start delivering the changed require to meet the scale of the climate challenges we face.

Any company setting a carbon reduction target, big or small, must first calculate their scope 1 and 2 CO2 emissions for the selected base year. This means gas, electricity and fuel used in company-owned cars for either 2019 or 2020. Fortunately, to support this, there are a number of free resources available, such as this tools library and the Carbon Trust’s carbon footprint calculator

Top tip – in most cases, businesses will find it preferable to select market-based reporting for scope 2 electricity, particularly if the business has limited capacity for onsite renewables and will be reliant on purchasing green electricity tariffs to decarbonise electricity consumption.

Step two

When calculating scope 3 value chain emissions the process becomes far more time and cost intensive. These might include emissions from business travel, or from the use of your products or purchased services. Yet, unlike for larger companies, the SBTi does not require scope 3 targets for SMEs, so there is no need to let this hold the process up. 

Once a business has completed step one, they should submit the calculated CO2 scope 1 and 2 emissions numbers and select a target of 1.5°C, which will equate to a 4.2% reduction p.a. The below 2.0°C option would not be recommended for any business looking to demonstrate a credible, internationally reputable level of climate commitment. It may also be useful to note that SMEs have a dedicated streamline to having an approved SBT, only costing $1,000, rather than $9,5000.

Step three

Whilst SMEs don’t need to submit a scope 3 target, they will need to commit to measuring and reducing these emissions. This is to afford the necessary time to invest in upskilling and making room for capacity to track these emissions. A good place to start is by using the GHG Protocol Quantis tool to estimate all fifteen scope 3 emissions, though it should be noted this tool uses data from the US and has some inaccuracies. At Ramboll, we have developed a country-specific version which we prefer to use with clients, but as the Quantis tool has been sanctioned by GHG Protocol it does have credibility and is a great place to get started.

Step four

When SMEs have their scope 3 estimates, they should identify which are the highest sources of emissions and compare them to ongoing government conversations. This action can become the basis of future proofing choices about which scope 3 emissions to begin collecting data on. For example, the UK government’s Streamlined Energy and Carbon Reporting (SECR) regulation, requiring the reporting of scope three business travel emissions as a minimum, suggests investment in business travel data would be a valuable choice.

Over time businesses should be actively increasing the percentage of scope 3 emissions they are collecting data and reporting on, with the ultimate goal of including 93% of scope 3 emissions over time.

Step five

With all the relevant data collected, the final step is for SMEs to implement carbon reductions measures. Of course, there is no need to wait for all the data if reduction opportunities become apparent throughout the process – this step can run in parallel to any of the others. Once businesses do have an idea on their total emissions however, this should inform dedicated planning towards their 1.5°C target.

Stay ahead of the curve

Building a sustainable society with a sustainable future is the responsibility of all sectors, and SMEs need to be doing more than just acknowledging it is a pressing matter. Businesses need to be acting. Regulation is coming, with ever tightening legislation, and no entrepreneur wants to see their company left scrambling. Credible climate compliance should be met on the front foot, for the benefit of internal and external perception, the bottom line, and of course the environment that sustains the economy we all operate within. To ignore these accessible steps towards action is tantamount to self-sabotage, as businesses will pay for inaction down the line.

About the Author

Author - Shane HughesShane Hughes leads teams of experts driving forward the net zero transition. Helping environmentally pioneering companies move beyond ‘climate fatigue’ through to supporting some of the planet’s largest corporations take their early steps on their net zero journey.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.